CASE STUDY: Wal-Mart in China

Wal-Mart Stores: Everyday Low Prices in China

Summary: (Taken From Harvard's site)
Although Wal-Mart, the world's largest company by revenue, was into its 9th year of operations in China, its stores were still losing money. It had created a miracle in the U.S. retail industry by revolutionizing the sector's business model and successfully implementing its model through innovative practices that enabled it to sell national brands at "Every Day Low Prices". The challenge Wal-Mart faced was whether it could transport its successful model to win in a market with many differing characteristics which threatened its low-cost structure and which could nullify its competitive advantage. Concerned with the application of established domestic business models in international expansion. Also sheds light on other globalization issues such as market entry strategy, localization vs. standardization, the effect of regulation changes on the competitive landscape, and firm performance.

Learning Objective: (Taken From Harvard's site)
To address competitive advantage and its sources (differentiation and cost leadership); debate standardization and localization in international expansion and strategy formation--the fit between firm strategies and external environments; provide students with a basic understanding of the concept of competitive advantage and its sources through a discussion of Wal-Mart's success in the U.S.; discuss the challenges of replicating a successful domestic strategy in a different market environment; explore whether a firm is able to transport its competitive advantage from one market to another using the example of Wal-Mart's entry into China; and think about potential strategies that Wal-Mart China should consider going forward.

Subjects Covered: (Taken From Harvard's site)
Competitive strategy, Global strategy, Consumer behavior, Industry standards, Standardization, Competitive advantage, Expansion, Consumer goods, Department stores, Retail stores, Retailers, Retailing, Business & government, Government & business, Multinational corporations, Internationalization, Localization, Public administration, Public sector.

(My Notes)
Users & Objectives:
1. Cassian Cheung- President of Wal-Mart China, recently resigned
2. Sam Walton, founder
3. Joe Hartfield- CEO of Wal-Mart Asia

Competitors:
• world rival- Carrefour, Thailand's Lotus, Uk's Tesco, Germany's Metro
• foreign operators would usually have a dominant market position at their home markets, strong liquidity, and came with long term plans for China
• mostly operated in the form of hypermarkets

Financial position:
• poor financial results for Wal-Mart China

WAL MART US
Strategy in US:
• opened “one horse”, rural, backwater towns ignored by other retailers
• aimed to serve customers who had travel long distances to save money
• grew outside competitors' radar screens to a substantial size to command economies of scale
• public listing provided company with ample resources to finance more rapid expansion
• selling brand name products for less
• offered multiple store formats, including discount stores, supercentres, warehouse stores, and neighbourhood markets
• brought customers from all income levels
• unique combination of culture and strategies at Wal-Mart that set it apart from its competition
• started by opening discount stores in small towns: (1) avoided direct competition from stronger players, (2) due to small populations it served once Wal-Mart opened a store, the town could not support another store of similar size, and (3) rural backwaters also reduced costs due to lower land and real estate prices



Cost Controls:
• one of company's core capabilities
• only worthwhile cost was the one that got their customers to buy a product and everybody played a part in keeping the cost down
• goal: to drive down the price of products to the lowest they could possibly be
• had a huge purchasing power with 68,000 suppliers, “love hate relationship”
• Wal-Mart demanded lower price, high quality, efficient bookkeeping and punctual delivery from their suppliers
• helped suppliers improve inventory management and efficiency by weeding out extra costs
• forced its suppliers to search hard for ways to eliminate the inefficiency in their own processes in order to drive costs to a minimum and to improve the quality of their products

Logistics Management:
• target was to have inventories at half the rate of sales and to have any required delivery arriving on the shelved within one day
• no store was more than a day's drive from its distribution centre
• use of technology gave Wal-Mart great efficiency in the supply chain arrangement and was a distinct competitive advantage, started using electronic data interchange (EDI), satellite technology: able to connect all stores to home office
• enabled it to offer its customers the right product mix at the right time while keeping inventory and associated costs as low as they could possibly be

Benefits to Workers:
• started profit sharing plans for rank and file workers, 2/3 of the American workforce owned stock in Wal-Mart
• “cross training”: people switched jobs to enable them to understand different parts of the company's operation, which gave them more variation int heir jobs
• financial numbers were also shared with every employee
• position against unions, would rather close a store than allow it to be unionised
• promotes open door policy so that employees could channel complaints
• employees were motivated, happy, and passionate about their job

Competitive Advantage in which customers were looking for:
• Quality of merchandise
• assortment of goods
• price level
• store environment
• customer support
• store hours
• availability of free parking
• Wal- Mart focused on two major drivers: Price and Service
• each Wal-Mart store monitored the prices of about 1500 items in their competitors' stores
• objective: to offer same merchandise at other local stores but at 20% less
• on-going program to lower prices even further when there was the opportunity to do so “roll back”
• “Special Buy”: a product with a special tag that offered everyday items bundled with additional amounts of the same product or another product for a limited time

Customer Service:
• 3 cardinal beliefs: (1) providing great customer service, (2) showing respect for the individual, and (3) striving for excellence
• these beliefs were translated to 10 specific business rules for every executive/ associate
• “Sundown rule” required for employees to answer requests from customers by the end of business hours

Wal Mart China
• 95% of world population was outside U.S
• Wal-mart China has been losing money since they arrived in August 1996
• Wal-Mart in Germany failed because it was hindered by strict union rule,high labour costs, zoning laws and existing competition
• growth in rural areas was much slower
• problems such as, backward infrastructure, diverse regional consumption patterns
• entry into the WTO gave foreign companies more control over wholesaling and distribution
• industry was crowded with both internationally renowned retailers and domestic players
• resulted to high store density in larger cities
• retail market was undergoing continuous consolidation to eliminate weaker operators
• foreign retailers grew rapidly and commanded a market share estimated at only 3% in 2004
• local rivals were competing head on with foreign operators
• supermarket segment was primarily dominated by domestic players
• localised demand, localised supply base, and localised distributio in China also provided domestic players with an edge in establishing strong regional dominance when foreign retailers found it hard to leverage national presence in a regional market
• China saw substantial growth but many factors either a legacy of history or ew phenomena born of reform still impeded the fast development of a national market

Income Disparity
• broadened gap I wealth between rich and poor and between urban and rural populatios
• income below US$500 limit purchases to daily necessities
• US $1000-$2000 purchase consumer durables and commercial housing
• US$2000- look for sophisticated products and advanced information services
• almost impossible to develop a uniformed national merchandising or marketing strategy
• satisfying consumer's demand in different regions became a costly practice
• low income in rural areas raised concerns on Wal-Mart's US-bred strategy of locating stores in smaller communities
• questions whether such areas could support a large supercentre and were forced to re-focus on more expensive, urban locations

Local Protectionism
• local governments had incetives to protect state-owned enterprises under their jurisdiction as they were the base of their political power and a source of private benefits as well as fiscal revenue
• Wal Mart's entrance to Shanghai: published a new commercial plan to restrict the opening of new supercentres in the inner city
• delay in obtaining municipal approval put Wal-Mart in a much disadvantaged position against major competition in Shanghai's retail market

Infrastructure:
• highways were costly to use, toll fees reached as much as 10% or more of total freight costs
• toll collection at the local level was arbitrary and illegal
• under-developed highway network that Wal-Mart depended on increased costs and more waste especially with perishable goods
• backward transportation network greatly added to the cost of inter-regional distribution
• logistics costs were around 20% of GDP compared with just 10-12% I developed markets

Regulatory Restrictions:
• when distribution centre served a large enough number of stores, economies of scale would be achieved therefore pushing costs down
• only three stores were allowed to be launched in one city and only a hadful of cities were open to foreign retailers
• every store opening had to be approved by the central government
• therefore this made Wal-Mart's expansion very slow
• stores in China were supported by two distribution centres, and they were significantly underused but was required given the slow speed of transportation thus usig the distribution centres did not enable Wal-Mart to reduce costs
• Carrefour expanded quickly to occupy important markets and established network by openly bending Chinese regulations

Lack of IT Network:
• lack of IT network and regulatory ban of satellite usage impaired retailer's effieciency in communicating with its 15,000 local suppliers
Chinese Consumers Culture
1. Many Trips, Little Purchase
• many Chinese spent leisure time in commercial centres instead of staying home and compared prices and quality among different shops
• purchase was often impulsive rather than according to plan
• consumers were brand conscious ad loyalty was very hard to cultivate when consumers always shopped around for best bargain
• people would rather pick up a small amount of goods at one time because most shoppers bked or walked which limited bulk buys
• takes Chinese customer at least 5 trips to buy as much as American shopper got I oe
• average cost of serving customer greatly increased
2. Fresh Means Alive
• freshness of food was an indication of quality
• Customers' demad for absolute freshness with poor transportation network required that a large variety of foods had to be procured locally instead of through Wal-Mart's centralised pocuremet system
• diminished economies of scale and interrupted supply chain meant higher costs insatisfying Chinese customers
3. Shoplifting
• associates morale was to easy to maintain when they were paid low wages and did ot have the upside of stock options
• management turn over was high
• labour official in China's Wal-Mart condemned for squeezing suppliers and making workers suffer

Class Discussion Questions: (Class Note)

1. Why is Wal-Mart successful in the US? What are Wal-Mart's competitive advantages and its sources?
Key Success Factors in US:
• one stop shop- buy things I bulk
• different values
• very patriotic
• low cost
• good logistics
• anti unionization policy
• frugal culture
• creative barriers to entry (rural locations)- small town
• reputation
• squeeze suppliers
• efficient logistics
• hiring practices (reducing benefits paid)
• own store brands
• product mix (only products that sell)
• continuously create value
• economies of scale

2. Should Wal-Mart replicate its domestic model in its original form in China? Why? Can it build the same competitive advantage in China through its success domestic model
3. Provide suggestions on potential strategies that Wal-Mart China should consider in going forward.
Wal Mart in China:(Using what is applicable/ not applicable to China from US key success factors)
• logistics: in store housing to reduce transportation, undercut transports, work with local suppliers who established transportig
• squeezing suppliers: no urgent need to modify, suppliers willing to be squeezed, because too many products/ suppliers already
• frugal culture: keep- anti unionization policy (Not applicable In China)
• create barriers to entry (rural locations)- must be modified, rural areas in China cannot support a Wal-Mart, build near highway (suburbs)
• reputation as U.S icon
• Economies of scale- parter with powerful Carforre is a good idea

Data analysis in Microsoft Excel

As we have seen in class, Excel is capable of performing a variety of statistical analyses. These can be accessed under the “Tools” pull-down menu, within “Data Analysis”. Some of the capabilities we have explored so far include:

Descriptive Statistics
Identify the range of data for which you would like statistics in the Input Range.
Specify how the data is arranged in your spreadsheet - whether the data for one variable is grouped within the same column or the same row.
If you have included labels to describe your data in the first row/column, check the box to indicate this (it is a good idea to do this, since it makes the results easier to read, particularly when you are analyzing several variables simultaneously).
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
Indicate which statistics you would like calculated. “Summary statistics” will provide most of the basic statistics you are interested in (mean, median, mode, variance, standard deviation, range, minimum, maximum, sum, count).

Histogram
Identify the range of data for which you would like a frequency table and/or a histogram in the Input Range.
If desired, identify the list of end points of the intervals you would like to use (in ascending order) in the Bin Range. Excel will choose equally spaced intervals if you do not specify any.
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
Select Chart Output if you would like a histogram in addition to a frequency table.

Correlation
Identify the range of data for which you would like correlation statistics in the Input Range (at least 2 variables).
Specify how the data is arranged in your spreadsheet - whether the data for one variable is grouped within the same column or the same row.
If you have included labels to describe your data in the first row/column, check the box to indicate this (it is a good idea to do this, since it makes the results easier to read, particularly when you are analyzing several variables simultaneously).
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
The output will appear as a matrix, with one row and one column for each variable.

Further details about these (or any other) Excel functions are available through the Help function in Excel.

MGMT 2000 Exam with Solutions

QUESTION 1 [8 points]

A particular type of printer ribbon is produced by only two companies, Alamo Ribbon Company and South Jersey Products. Suppose Alamo produces 65% of the ribbons and South Jersey produces 35%. Eight percent of the ribbons produced by Alamo are defective and 12% of the South Jersey ribbons are defective.

a) A customer purchases a new ribbon. What is the probability that Alamo produced the ribbon? [2 points]
b) The ribbon is tested, and it is defective. Now what is the probability that Alamo produced the ribbon? [2 points]
c) Which company would you choose to become your ribbon supplier and why? What other factors must you consider when making this decision? [4 points]

Answer:
a) 65%
b) p(A|D) = p(A,D) / p(D) = (.65)(.08) / [(.65)(.08) +(.35)(.12)] = .553
c) I would have to know the price of both types of ribbons and any costs (time, damages etc.) associated with identifying a particular ribbon as defective. If the price were the same for both and costs of identifying defectives were negligible, I would choose Alamo since it has the greatest market share (and may therefore be more reliable) and the lowest defect rate.


QUESTION 2 [10 points]

You decide to purchase new furniture for your apartment. The cash price for the furniture is $1500 (option A). You have the option to select an instalment plan of $84/month for 24 months (option B).

a) Draw a cash flow diagram for each option. [2 points]
b) What is the interest per month that you are charged? [4 points]
c) What are the nominal and effective rates per year? (If you were unable to solve part b), assume an interest rate of 1.5% per month for your calculations here and for part d).) [2 points]
d) Which option would you select and why? [2 points]

Answer:
a) Option A Option B
0 1 24
-$84
-$1500

b) PV = U * [(1+i)n-1]
[i(1+i)n]
at I=2%, PV(B-A) = 1500 + 84 ((1.02)24-1)/[(.02)(1.02)24) = -88.77
at I=3%, PV(B-A) = 1500 + 84 ((1.03)24-1)/[(.03)(1.03)24) = 77.41

IRR = r1 + (r2-r1) |NPV1| .
|NPV1| + |NPV2|
= 2 + (3-2) (88.77) / (88.77+77.41) = 2.53%

c) nominal = 12(2.53) = 30.36%
effective = (1.0253)12 –1 = 34.96%
or, using the 1.5% rate:
nominal = 12(1.5) = 18%
effective = (1.015)12 –1 = 19.56%

d) I would pay the $1500 up front. The furniture store is implicitly offering me a loan at over 30% interest. I can get a bank loan for considerably less.

QUESTION 3 [11 points]

You want to invest $10,000 in the stock market by buying shares in one of 3 companies. Shares in Company A, though risky could yield a 50% return on investment during the next year. If the stock market conditions are not favourable (a “bear” market), the stock may lose 20% of its value. If the market is neutral, the value of Company A stock will not change. Company B provides safe investments with 15% return in a “bull” market, 10% in a neutral market, and only 5% in a “bear” market. Company C is a counter-cyclical investment. It provides 10% in a “bear” market and loses 5% in a “bull” market. Its value does not change in a neutral market. All the publications you have consulted are predicting a 60% chance for a bull market, a 10% chance for a neutral market, and a 30% chance for a bear market.

a) You began to draw a decision tree to solve the problem but were called away by the sound of reindeer landing on your roof. Complete the attached tree, filling in the shaded areas. [5 points]



Bull 0.6
15000

Company A Neutral 0.1
10000

Bear 0.3
8000


Bull 0.6


Company B Neutral 0.1

11150
Bear 0.3



Bull 0.6


Company C Neutral 0.1


Bear 0.3




b) Which stock would you invest in? [1 point]
c) Compute the value of perfect information. [3 points]
d) Perfect information about the future performance of the stock market is impossible to obtain. Knowing that, why would you compute the value of perfect information? [2 points]

Answer:
a)

Bull 0.6
15000

Company A Neutral 0.1
10000
12400
Bear 0.3
8000


Bull 0.6
11500

Company B Neutral 0.1
11000
12400 11150
Bear 0.3
10500


Bull 0.6
9500

Company C Neutral 0.1
10000
10000
Bear 0.3
11000

b) company A
c) EVw/PI = .6*15000+.1*11000+.3*11000 = 13400
VOPI = 13400-12400 = 1000
d) The value of perfect information gives us an upper bound on the amount we would be willing to pay for any kind of information. We can use this value as a filter to eliminate from consideration any offers of information at a price greater than the value of perfect information.

QUESTION 6 [9 points]

Schulich tracks the number of students graduating in each term.

Year Term Graduates Moving Average
2000 Fall 23
2001 Winter 48 75.33333
2001 Summer 155 74.66667
2001 Fall 21 70
2002 Winter 34 76
2002 Summer 173 75
2002 Fall 18 69.33333
2003 Winter 17 60.33333
2003 Summer 146 65
2003 Fall 32 69
2004 Winter 29 68
2004 Summer 143

a) Use the above data to compute seasonal indices. [5 points]
b) Over how many observations was the moving average taken? [1 point]
c) Explain the meaning of the seasonal index for Fall. [2 points]
d) What Excel feature is helpful in organizing data to compute seasonal indices? [1 point]

Answer:
a)
Moving Average
F W S
75.33333 0.637168 0.637168 2.075893
74.66667 2.075893 0.3 0.447368 2.306667
70 0.3 0.259615 0.281768 2.246154
76 0.447368 0.463768 0.426471
75 2.306667
69.33333 0.259615 0.341128 0.448194 2.209571 2.998893
60.33333 0.281768
65 2.246154 0.341254 0.448359 2.210387
69 0.463768
68 0.426471

b) 3
c) The number of graduates in the fall term is 34% of what you would expect in a typical term if there were no seasonal variation.
d) pivot table
QUESTON 7 [7 points]

At the latest firemen’s union meeting, the membership expressed concern that their wages were not keeping up with the pace of inflation. The following regression model was created to investigate the growth in firemen’s average wages in thousands of dollars:
ln(Wage) = 10.69 + 0.039 (Time)
where Time = 1 in the year 1990.

a) Forecast firemen’s average wages for 2006. [1 point]
b) Compute the growth rate. [2 points]
c) Inflation has been in the 2-3% range in the last decade. Are the firemen justified in their concerns? Why or why not? [2 points]
d) Sketch a rough graph of firemen’s wages over time. [2 points]

Answer:

a) ln (Wage) = 10.69 + 0.039(17) = 11.353
Wage = 85,220.73
b) e0.039 - 1 = 3.98%
c) No. On average, their wages are growing at slightly more than the rate of inflation. (However, individual firemen’s wages may be increasing at a faster or slower rate, so some may have reason for their complaints while others would not.)
d) Wage($)







Time

QUESTION 8 [8 points]

The Finance Department at Treasure Island Toys is evaluating its cost structure. One of the things the company would like to evaluate is the appropriateness of its allocation of expenses between fixed and variable costs. The Finance Department produced the following graph using financial results for the company and industry statistics for the last 10 years:

a) Is this an effective graph for comparing the company’s cost allocation to industry standards? Why or why not? [3 points]
b) Does the company have high or low variable costs relative to the industry? [1 point]
c) Last year, the company’s sales were $500,000 and profits were 5% of income. Unfortunately this has been a slow year, and sales are forecast to drop to $400,000. What will be the effect on the company’s profit? Does the company appear to have made a good choice with respect to its degree of operating leverage under the current circumstances? [4 points]

Answer:
a) It is effective. It shows the degree of operating leverage for the company over time, which allows us to see any trends. It also shows the values relative to industry totals for easy comparison. It is easy to see that DOL has been increasing for the company while industry values remained steady; the company’s DOL is now appreciably higher than industry average. The graph is clear and easy to follow. One improvement could be to put actual years rather than a time index for the horizontal axis.
b) The company has a higher proportion of variable costs than the industry.
c) % change in sales = (400-500)/500 = -0.2
DOL = % change in profit/%change in sales ~= 2.5
Therefore % change in profit must be about –0.5
Profit(last year) = 500,000*.05 = 25,000
Profit (this year) = 25,000 (.5) = 12,500
The company’s profit will drop to $12500.
Because the company is more highly leveraged, the effect on profit is greater than it would have been if the company followed industry standard. Being more leveraged is hurting the company in this instance as its profit will drop more than it would have if DOL had been lower.
QUESTION 9 [7 points]
True/False
Determine whether the statement is true or false and circle the corresponding word.

a) An  of 0.1 weights the most recent observation more heavily than an  of 0.2. True False
b) Ieff compounded monthly is greater than ieff compounded quarterly for the same APR. True False
c)
d) Fred and Jane each invest $100 today. Fred earns 6% per year for the first 2 years and 8% per year for the second 2 years. Jane earns 8% per year for the first 2 years and 6% per year for the second 2 years. At the end of 4 years, Fred and Jane will have the same amount of money. True False
e) Fred and Jane each invest $100 at the beginning of each year for a period of 4 years. Fred earns 6% per year for the first 2 years and 8% per year for the second 2 years. Jane earns 8% per year for the first 2 years and 6% per year for the second 2 years. At the end of 4 years, Fred and Jane will have the same amount of money. True False
f) Quarterly seasonality can be captured in a regression model using 3 dummy independent variables. True False
g) When forecasting sales with seasonality, we use the model Deseasonalized Sales = a + b (Time) because it predicts the trend alone, while the model Sales = a+b (Time) would predict both the trend and seasonality. True False




QUESTION 10 [6 points]
Select the correct answer(s). Points will be granted for correct choices but will be deducted for incorrect choices.

1) The coefficient of determination (r2) tells us
a) that the coefficient of correlation is larger than 1
b) whether R has any significance
c) that we should not partition the total variation
d) the proportion of total variation in y that is explained by x

2) What Excel function can be used to do the equivalent of: IF(J4>H3,J4,H3)
a) MAX
b) MIN
c) GOALSEEK
d) COUNT

3) An investment is acceptable if its IRR
a) is exactly equal to its net present value (NPV)
b) is exactly equal to zero
c) is less than the required return
d) exceeds the required return

4) Net present value:
a) is equal to the initial investment in a project
b) compares project cost to the present value of the project benefits
c) is equal to zero when the discount rate used is less than the IRR
d) is simplified by the fact that future cash flows are easy to estimate
e) requires a firm to set an arbitrary cut-off point for determining whether an investment is acceptable

5) What are the disadvantages of the payback period method:
a) ignores the time value of money
b) biased against long-term projects
c) biased toward liquidity